Financing an ADU
Where to Find the Money?
There are different ways to fund an ADU project.
All of the options have pros and cons and must be investigated and weighed based on your needs. This also includes tax implications.
We can help discuss some ideas, arm you with a list of starter questions, and help point you in the direction of the professionals that can answer your questions best.
Below are some, but not all, of the potential funding sources that you may want to discuss with financial professionals.
Friends and Family
This one may sound odd, especially to be the first in the list, but there are some not so obvious reasons this may actually be the best option for many
May be able to get an interest loan lower than the market offers
Allows the lending friend or family to get a better interest rate than a savings or money market account
Grandparents may find this option attractive for non-monetary reasons
It can allow them to downsize and be close to family for grandkids or for assistance as they age
The ADU can be custom built to suit their needs including accessibiliy concerns which can be hard to find
Home Equity Loan / Home Equity Line of Credit
A Home Equity Loan and a Home Equity Line of Credit (HELOC) both access the equity built up in your home, but they are slightly different.
Loan and line of credit limit will be based on a percentage of how much equity you have in your property
Loan will lock in a constant interest rate, but must be taken all in one lump sum
HELOC can be used as needed, but its interest rate adjusts with the market
Some HELOC products will also allow you to lock in an interest rate
Interest rates will be above typical mortgage rates
Both have pros and cons and vary slightly based on the lender. It’s also worth noting that different lenders will have different products that may be better for you.
Cash Out Refinancing
Cash out refinancing accesses the equity in your property. It does this by creating a new loan, for a larger amount than you currently owe
Can access appriciated value of home since original purchase
Will almost certainly create a larger monthly mortgage payment
Resets payoff date based on loan agreement
Can be financially simpler than other loan options
Interest rates higher, but comparable to typical mortgage rates
Longer approval process than Home Equity options
Probably not attractive if you currently have a low interest rate locked in
Construction or Renovation Laon
A construction or renovation loan allows you to borrow against the future value of the property after the ADU is completed. There are a huge number of options available for this type of financial product. It is vital to do plenty of research on not just the approach, but what institution offers the best product for you.
Allows a larger property value for calculating the loan
May be able to include potential income from ADU with qualifiers
ADU appraisals are still not mainstream so they may be difficult
May require inspections and specific fund draw process
May require a new mortgage once construction is completed
Will most likely replace your current morgage
Cash / Savings
Under the right conditions, it may be possible to keep costs down so low, that an ADU could be built for cash only. More than likely though, savings will work together with one, or several of the options listed above.
Simple and easy to access for time-sensitive issues
Great to use for design and permitting costs saving loan funds for construction reducing time interest will accrue
Useful for contingency funding
Usually requries years of savings
Sweat equity and deal hunting for materials will help a great deal here
